Broadcom (AVGO) experienced significant stock movement following its recent earnings report, showcasing a complex interplay between strong financial results, investor sentiment, and strategic disclosures from company leadership. The stock saw an initial surge in after-hours trading before reversing course, ultimately declining by approximately 17% over two trading sessions. Currently valued at a market capitalization of $1.65 trillion, AVGO stock is down 18% from its all-time high. The market’s reaction underscores concerns around potential margin compression as Broadcom scales its production of AI chip systems, a factor highlighted during the earnings call.
The company delivered fourth-quarter earnings of $1.95 per share, accompanied by revenue of $18.02 billion, both exceeding analyst expectations. CEO Hock Tan projected that AI chip sales would double year-over-year (YoY) to $8.2 billion in the current quarter, driven by the increasing demand for custom chips and AI networking semiconductors. A considerable backlog of $73 billion for custom chips and data center components was also announced, spanning the next 18 months. This strong performance initially fueled optimism within the market. However, reservations quickly surfaced regarding the company’s future profitability.
A key element driving the initial decline was CEO Tan’s bold revelation regarding his 2030 compensation incentives, which are directly linked to achieving AI revenue exceeding $120 billion. This significant commitment to AI growth highlights the company’s strategic focus, particularly on serving a select group of hyperscalers and AI labs engaged in the development of superintelligence. The CEO emphasized that Broadcom’s competitive moat is built on custom application-specific integrated circuits (ASICs) and networking infrastructure, differentiating itself from the market dominated by merchant graphics processing units (GPUs) sold to numerous smaller enterprises. He asserted that networking becomes the critical bottleneck as AI clusters scale from 100,000 to potentially 1 million GPUs operating simultaneously.
Further reinforcing this strategic direction, Tan revealed projected accelerated revenue growth in fiscal 2026, surpassing the previously forecasted 60% rate, largely due to a recently converted customer dedicated to inference workloads. Notably, Broadcom confirmed Anthropic as a major customer, having secured a $10 billion order for Google’s (GOOG) (GOOGL) tensor processing units during the quarter. Currently, Broadcom has identified five customers for these custom chips, with two additional prospects under consideration. The shift towards optical networking, facilitating greater memory sharing across multiple accelerator chips within a single rack, is also expected to gain momentum, particularly as cluster sizes expand, potentially reaching 512 or 1,024 chips. This transition from copper-based connections to optical networking capable of 100 terabits per second bandwidth is key to improving training convergence times.
Despite acknowledging near-term margin pressure, Broadcom maintains a bullish long-term outlook. Analyst forecasts project a substantial increase in revenue, rising from $64 billion in fiscal 2025 (ending in October) to $227 billion in fiscal 2030. Correspondingly, adjusted earnings are anticipated to expand from $6.82 per share to $23.37 per share during this period. If AVGO stock is priced at 27x forward earnings, which aligns with the company’s three-year average, the stock should trade around $630 in late 2028, representing an upside potential of 70% from its current level. Currently, out of the 40 analysts covering AVGO stock, 34 recommend “Strong Buy,” three recommend “Moderate Buy,” and three recommend “Hold.” The average AVGO stock price target is $456.20, indicating a significant potential for growth.